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VMware profits pinched in Q4

Services can't save the day

For all the talk about how server virtualization's day has finally come for the x64 server platform - and how the economic meltdown has finally given customers the impetus to go virtual with their iron - VMware couldn't grow both sales and profits in the final quarter of 2009.

It is probably safe to blame Microsoft's Hyper-V R2 and - to a lesser extent - Citrix Systems' XenServer for the fact that VMware software license sales fell by 3.4 per cent, to $304.2m. VMware is no doubt feeling competitive pressure. But the new vSphere 4.0 stack, and its ESX Server 4.0 hypervisor, might be part of the problem too.

VMware has some more affordable options, and it could very well be that companies are taking the company up on these too. Services sales in Q4 skyrocketed 52.2 per cent in the final quarter of 2009, and if software license sales had tracked to this rate, VMware would have been pushing up towards $480m. That $175m that might have been there if VMware could have stood still with early 2008 pricing and the lack of competitive pressure from Microsoft, Citrix - and now Red Hat and Oracle - would have been truly remarkable. But that's now the way it turned out.

That said, VMware has adjusted well to the new market realities and was still able to grow overall sales by 18.2 per cent, to $608.2m. The problem is this: That extra revenue cost more money to push and pull, and this cut VMware's net income by 49.4 percent, to $56.4m in the quarter. Wall Street will probably not be too happy about this, unless Paul Maritz, VMware's president and chief executive officer, and Mark Peek, the company's chief financial officer, can explain how they will grow the company and get back on track with profits.

In a statement announcing the numbers, Peek said that the economy was "slowly recovering" and that VMware has "improved near-term visibility as customers move forward with their IT investments." To that end, Peek said that VMware expected sales in the first quarter of 2010 to be in the range of $580m to $600m (up 23 to 28 percent over last year) and that full-year revenues would rise by 21 to 26 per cent, hitting from $2.45bn to $2.55bn.

For all of 2009, VMware raked in just a little over $1bn in software license fees (down 12.6 per cent), with services revenues rising to $994.5m (up 41.5 per cent). When you do the math, VMware had $2.02bn in revenues (up 7.6 per cent). Net income for the year was $197.1m, a drop of 32.1 per cent compared to 2008. Don't feel bad for VMware, though. The company's cash hoard has risen by 35.1 per cent in 2009, to $2.49bn. VMware can ride out any storm and bide its time with that kind of cash laying around.

In a conference call with Wall Street analysts, Peek said that VMware was running a special promotion (meaning discounts) to encourage customers to upgrade to the highest vSphere 4.0 edition, called Enterprise Plus, which accounted for $100m in license sales in the fourth quarter. Enterprise license agreements - a trick that VMware learned from Microsoft - accounted for around 20 per cent of revenues, about the same as in 2008, but this time around there were more deals with smaller contracts to get that 20 per cent.

VMware also had a bunch of customers who had licensed earlier ESX Server hypervisors and management tools, and getting back maintenance on these releases (which was necessary to do upgrades to vSphere 4.0) also helped pump up services sales in the quarter. Software maintenance revenues in the fourth quarter accounted for $246m, up 53 per cent, according to Peek. Professional services sales rose by 47 per cent, to $58m.

VMware ended the quarter with $1.3bn in deferred revenues, up 34 per cent. The company had 7,100 employees, up 400 from a year ago.

Peek said that VMware was planning conservatively for 2010, that "the world is fragile both politically and economically," and that the company was planning for a bumping recovery. That said, VMware expects single-digit license revenue growth in the first quarter of 2010, and that given that the second quarter of last year was a low point, and that it would have growth with that compare, too. Peek cautioned Wall Street that the compare with Q4 2009 will not be so easy. ®